YHOO and AAPL: Read Between the Lines for Danger Signs

by Hilary Kramer | January 30, 2013 12:30 pm

With earnings season under way, it’s easy to get lost in the numbers – but don’t let them fool you. Just because a company meets or exceeds expectations doesn’t mean that the stock is golden. And that’s exactly the case with two of the biggest names in the tech world: Apple (NASDAQ:AAPL[1]) and Yahoo (NASDAQ:YHOO[2]).

Have you ever heard the saying, “Don’t try to catch a falling knife?” Well, I can’t think of a better way to describe what’s happening to Apple. The company is spiraling down and they still haven’t hit bottom. I know the numbers looked good in last Wednesday’s earnings release, which included record sales for its iPhone line.

But you need to take a close look at their profit margins, which dropped 6% to 38.6%. That’s a huge loss and a really bad sign for a tech bellwether that can’t afford to let their prices drop (which is exactly what happened). Prices for the older iPhones fell and sales just weren’t as strong as expected.

Unfortunately, Apple has become a victim of its own success, and now, they’ve shown investors that they can’t keep beating the numbers. Now is not the time to buy AAPL. Investing in this stock will only pull you down with it.

The same applies to Yahoo. Although they beat earnings expectations, I wouldn’t be so quick as to say they’ve made a comeback. They’ve got bad metrics and bad margins. Plus, their page views are continuing to drop. Even though CEO Marissa Mayer announced that Yahoo is back on track[3], the company is still taking a hit where it counts: its core business of display advertising and search business.

Yahoo is a little fish in a big pond, and with tech giants Google (NASDAQ:GOOG[4]) and Microsoft (NASDAQ:MSFT[5]) to compete against, I don’t see them coming up with any game-changing technology that will allow them to come out on top. You don’t want to own Yahoo right now.

However, there is one stock that I am bullish on, and that is Microsoft. You read that right. MSFT has been in the dog house for a long time, but I believe that it is ready to come out. The stock quietly edged higher last Thursday after beating earnings estimates (but missing on revenue), and I like the potential of their enterprise software and cloud programming to offset Windows 8’s struggle to get off the ground.

It’s actually a good thing that there’s no buzz surrounding MSFT, because this gives them the opportunity to avoid the pressure of the spotlight and really surprise us down the road. Right now, MSFT is a cheap stock, trading around 6X this year’s earnings with a nice dividend, and is a good choice if you’re looking for a solid company to add to your portfolio.

To hear more on my take on which stocks will do well, watch my video below!

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This earnings season will be an interesting one, and I can’t wait to see what the other companies report. May the best stocks win!